ESG View - April 2023

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Welcome to the April edition of ESG View!

Spring is a splendid season: not just as the days are brighter and the leaves are greener but as it represents new beginnings and a positive anticipation of things to come. In life, the journey can sometimes be more exciting than the destination. And so it is with ESG. This month we see a flurry of activity from policy makers taking 'renewal' to new heights and exploring ways to (a) refine their approach - whether that be on existing governmental strategy (the UK's Green Finance Strategy and the revised ASEAN Taxonomy) and regulation (SFDR) or (b) introduce new concepts ('ecocide' in Europe, 'green deposits' in India and a 'nature repair market' in Australia).

As I write this, I am in NYC to discuss ESG with clients, peers and policy makers across the pond. It is very much a live topic state-side and this week saw Gary Gensler, the Chair of the Securities and Exchange Commission (SEC) testify before the House Financial Services Committee on the oversight of the SEC. If you'd like to discuss more about navigating this dynamic landscape including around issues such as anti-trust, do not hesitate to get in touch.

In the meantime, in homage to all those valiant individuals taking strident steps to progress the cause of sustainability in the US despite some strong political headwinds, let me invoke the spirit of John Lennon and say that if you are feeling the itch to have your voice heard (power to the people!), this edition features a bumper crop of consultations on a variety of topics from the EU Taxonomy, CBAM to AI. So do get engaged within your firms and industry groups to share your perspectives. 

For those in the UK and Europe who want to deep-dive further into the world of ESG, tune into our webinar on the 27 April at 11am BST titled: ESG and Brand Value: The Risks and Rewards. The event programme is designed for everyone involved in the creation and enforcement of brands and will look at the influence of key stakeholders, advertising standards and regulations, and trademark protection and enforcement.

Best wishes,

Sonali Siriwardena
Partner - Global Head of ESG
sonali.siriwardena@simmons-simmons.com 

Global developments

1. IOSCO report published to Develop a Global Assurance Framework for Sustainability-related Corporate Reporting (multi-sector)

The International Organisation of Securities Commissions' (IOSCO) has continued its work on assurance and ethics standards over sustainability-related corporate reporting. In March, it published a Report which seeks to develop a global assurance framework on this issue.

What: The Report sets out IOSCO's vision for a global assurance framework for sustainability-related corporate reporting and summarises the insights from its fact-finding work on assurance over sustainability-related information, elaborates on the priority areas for the international assurance and ethics standard setters' (i.e., the IAASB and the IESBA's) consideration, which was highlighted in IOSCO's September 2022 statement.

Looking ahead: The standard setters are working towards issuing their exposure drafts by September 2023 (IAASB) and December 2023 (IESBA), respectively, and approving the standards on a timeframe in order to allow issuers and assurance providers to familiarise themselves with the content ahead of the end-2024 financial reporting period. Early engagement with the standard setters' initiatives is encouraged to support readiness to apply the standards soon after they have been finalised in late 2024.

2. UN-backed Race to Zero launches a net-zero transparency tool (multi-sector)

What: On 29 March, the UN-backed Race to Zero campaign launched Data Explorer, a data tool created to enhance transparency and accountability around net-zero commitments. The platform hosts data from the largest 500 companies in the campaign and the data is compiled from the Climate Disclosure Project (CDP), which is the largest global environmental disclosure system. The platform is already serving as a useful dataset, with initial findings showing that nearly two thirds of the 500 companies have published a plan to get to net-zero emissions by 2050. Also, using the data of the 393 companies that published historical emissions data, there has been a decline in emissions at a mean rate of -6.45% per year over the period 2019 to 2021, based on the companies' direct (scope 1) and indirect (scope 2) emissions.

Looking ahead: The platform will be contributing to the Global Stocktake process this year as part of the UN Conference of Parties in Dubai (COP28), so keep an eye out for further reports and updates towards the end of 2023.

3. FRS ISSB Sustainability and Climate Reporting Standards update (multi-sector)

What: On 4 April, the International Sustainability Standards Board (ISSB) announced that it will provide transitional relief to companies applying the new S1 (general requirements) and S2 (climate) disclosure standards, which are anticipated for release at the end of Q2 2023 (see our February ESG View for details of the release). In the first year of reporting, companies will be able to prioritise climate-related disclosures and will not be expected to "provide disclosures about sustainability-related risks and opportunities beyond climate-related information" or "disclose Scope 3 greenhouse gas emissions". This is intended to give companies time to familiarise themselves with the new standards, build out internal reporting systems and meet the baseline reporting standards irrespective of where they are in their current disclosure practices.

Looking ahead: ISSB plans to launch a consultation next month on its future priorities for standard-setting relating to biodiversity, human capital, human rights and integration in reporting. Keep an eye out for this in future editions of ESG View.

European developments

1. European Commission publishes a series of answers on interpreting SFDR (financial institutions)

What: On 14 April, the European Commission published a series of answers on the interpretation of the SFDR.

The eight questions being answered are those which the European Supervisory Authorities (ESAs) submitted to the Commission on 9 September 2022 (see our summary of the questions here.) These represented the biggest remaining significant "known unknowns" - where key SFDR interpretative questions had not yet been formally answered by EU regulators.

We now, some seven months later, have the Commission's opinions.

What do the Q&As cover?

In order of likely importance for the financial services industry, the questions cover:

• The definition of "sustainable investments"
• What it means to "consider" principal adverse impacts (PAI)
• The definition of article 9(3) products which have an objective of the reduction in carbon emissions
• The timing of periodic reports for portfolio management services
• The 500 employee test for mandatory PAI compliance

Our view: For the most part, the Commission's answers are generally broad and neutral, rather than prescriptively identifying a narrow definition or answer (although there are one or two exceptions). Generally speaking, the Commission emphasises that SFDR is a disclosure-based regime, and emphasises that the onus is generally on firms to disclose what they do, and for what they do to be consistent with the core requirements of SFDR.

We expect that the asset management industry will strongly welcome the Commission's opinions, as its approach of allowing firms the flexibility to disclose what they do will be a relief. Read a summary of the Commission's answers and our high-level reaction to them in our client note.

2. Germany's financial authority clarifies its views on collaborative engagement by investors (financial institutions)

What: On 30 March, Germany's financial regulator BaFin published its views on collaborative engagement by investors. Collaborative engagement is an issue of particular importance to investors who wish to further a company's pursual of ESG goals, since this engagement can fulfil conditions of "acting in concert". Under German law, investors acting in concert may, amongst other things, be required to make a mandatory takeover offer to the company and can lose their shareholding rights if they fail to do so.

The BaFin illustrated its position by way of six different examples, the key takeaways of which can be summarised as follows:

• Multiple investors can meet with management to discuss specific ESG topics as long as they do not discuss concrete voting behaviour.
• Investors may also address a joint letter to company management concerning specific ESG topics that they believe management should consider, provided again that the investors do not agree to voting behaviour in this context.
• If investors are not satisfied with management's treatment of certain ESG issues, they can discuss possible escalation strategies (e.g. shareholder resolutions on the issue in question) if they do not explicitly agree or tacitly consent to concerted voting.
• An open letter on specific ESG topics jointly formulated by investors may be considered as acting in concert if the investors effectively seek a change of the company's business focus.
• In principle, it is harmless if an investor representative expressing views on certain ESG topics in a general assembly emphasises that other investors share these views.

Our view: As can be inferred from the above examples, the BaFin generally positions itself as rather permissive. Going forward, investors in German companies may use this safe haven to pursue ESG goals with greater legal certainty.   

3. European Parliament votes unanimously for recognition of ecocide (multi-sector)

What: The European Parliament has voted unanimously in favour of the inclusion of "ecocide" in the EU's revised Environmental Crimes Directive (the Draft Directive). New Article 3(1a) of the Draft Directive establishes a basic category of behaviour which must be criminalised by EU Member States. The conditions of harm are where such behaviour causes severe and either widespread, long-term or irreversible damage it must be treated as an offence of particular gravity. The proposal mandates Member States to ensure that those gravest crimes are sanctioned accordingly in their legal systems.

Commenting on the development, international lawyer and Co-Chair of the Independent Expert Panel for the Legal Definition of Ecocide welcomed the step, noting that, "It is greatly encouraging that the European Parliament is taking the concept of ecocide seriously... This is a most significant first step, as the EU seeks to play a leadership role in taking the region and the world to a more benign environmental future."

Looking ahead: The final stage for ecocide to be definitively recognised in European law will be agreement from the European Council and the European Commission on the Parliament's proposed position - these deliberations will occur over the coming months. 

Our view: The EU's recognition of ecocide would be globally significant: all EU Member States would be required to transpose the creation of this new crime into domestic legislation and, with EU States making up over 20% of state parties to the International Criminal Court, it would be a decisive step towards international recognition of the crime of ecocide.

UK developments

1. Green Finance Strategy (financial institutions)

What: On 30 March, the UK government published its Mobilising green investment: 2023 green finance strategy (the Strategy) focusing on green investment and opportunities for the UK's financial services industry. It sets out the plan for a global transition to a resilient, nature-positive, net-zero economy with the intention of reallocating funds and investing into new technologies, services and infrastructure. On the same day, the UK government published its response to the independent report, Mission Zero: Independent review of Net Zero. See here our recent article considering the tax elements of this response.

Key initiatives:

The Strategy considers a broad range of initiatives to enable the UK to lead the way on greening finance. Here is a brief summary of some key proposed initiatives, which we will be monitoring closely and will report on as they develop further:

• UK Green Taxonomy: a consultation, expected in Autumn 2023, will likely include nuclear energy. In scope companies will need to report voluntarily for a testing period of at least two reporting years following which, the Government will consider mandating disclosures.
• International Sustainability Standards Board (ISSB) Standards: a formal assessment to determine whether the ISSB Standards are suitable for UK companies to be launched as soon as the final ISSB Standards are published (expected June 2023).
• Transition Plan Taskforce (TPT): a consultation to introduce requirements for the UK's largest companies to disclose their transition plans expected once the TPT framework is finalised in late 2023.
• Taskforce on Nature-Related Financial Disclosures (TNFD): embed the final TNFD framework into UK policy when it is published (expected September 2023).
• Transition Finance Market Review: launch an independent Transition Finance Market Review to consider what is needed for the UK to become a leading provider globally of transition financial services and innovative instruments on the pathway to 2050.
• Sustainability Disclosure Requirements: The Strategy's publication came the day after the FCA announced a delay to the publication of its policy statement and final rules on its Sustainability Disclosure Requirements (SDR) and investment labels regime. Originally expected at the end of Q2, it will now be published in Q3 (see our article here). The Strategy commits to implement SDR with further details to follow in the summer to reflect the rapid development of international standards.

A more detailed report on the Strategy is available here.

Middle East developments

1. Dubai Free Zones Council commits to D33 goals (multi-sector)

What: The Dubai Free Zones Council (DFZC) is striving towards making Dubai's free zones a global hub for investments as well as achieving the Emirates' strategic goals. "Free zones" are economic areas ruled by their own specific regulations, which have been introduced by the government to diversify the economy. DFZC has committed to achieving the goals of the Dubai Economic Agenda (D33) through enacting various initiatives and programs. These initiatives include the Free Zones Energy Demand Management Strategy (the Strategy) which seeks to reduce the demand for energy and water by 30% by 2030 by decreasing the demand for electricity and energy consumption from free zones and companies. The Strategy will also support the achievement of the objectives of the UAE Net Zero initiative aimed at climate neutrality by the year 2050.

2. KSA national policy on equal employment opportunities (multi-sector)

What: On 10 January, the Government of the Kingdom of Saudi Arabia introduced a new national policy to promote equality opportunities and treatment in employment and occupation in the Kingdom of Saudi Arabia (the Policy). The Policy prohibits any direct or indirect discrimination and specifically prohibits the exclusion of an individual on the grounds of ethnicity, colour, gender, origin, social origin, disability or age, as well as other grounds. While direct or indirect discrimination is strictly prohibited, positive discrimination on the grounds of qualification and actions taken by employers which may result in favouring Saudi nationals pursuant to their obligations under the Saudisation requirements, are not expressly excluded.

The intention of the Policy is to develop initiatives and programmes to ensure that women and individuals with the least opportunities can play a part in the workplace. Pursuant to the Policy, current provisions of the employment regulations in the Kingdom of Saudi Arabia will be reviewed to ensure that statutory laws do not contain any discriminatory provisions. The Policy will cover individuals working in both the public and private sector and will be implemented in two phases over ten years. The goals of the Policy will be executed and subsequently evaluated after five years.

3. Qatar's first Green Guarantee issued by Standard Chartered Bank and Siemens Energy (financial institutions)

Standard Chartered Bank and Siemens Energy have collaborated to issue Qatar's first Green Guarantee relating to a solar power project which will tackle the country's climate change action plan and its carbon footprint. It is intended that the Green Instrument will assist with the completion of the project as well as the long term sustainability of the project.

APAC devlopments

1. ASEAN updated sustainable finance taxonomy (financial institutions)

The momentum on net-zero ambitions continues in Asia as theAssociation of Southeast Asian Nations (ASEAN) Taxonomy Board (ATB) took the next step towards meeting the Paris Agreement commitments, with the release of the ASEAN Taxonomy for Sustainable Finance Version 2 (Version 2) on 22 March. 

What: Similar to the EU Taxonomy Regulation, the AESEAN Taxonomy seeks to harmonise classifying sustainable activities and assets, and to provide a "common language" for assessing whether a company and its activities are sustainable.

Version 2 expands on the first version by adopting a more advanced assessment and methodology that is based on certain technical screening criteria (TSC) and science-based thresholds in classifying activities. It also highlights the importance of social aspects in the Taxonomy, by incorporating it as the ASEAN Taxonomy's third Essential Criteria, alongside "Do No Significant Harm" and "Remedial Measures to Transition".

Looking ahead: ATB will hold targeted consultations with key stakeholders on the assessment methodology as well as the metrics and TSC for the energy sector under the Plus Standard. Following these consultations, the ATB intends to finalise the TSC for the energy sector in early 2024.

2. Reserve Bank of India (RBI) green deposit guidelines (financial institutions)

What: The Reserve Bank of India has this month announced the framework for the acceptance of green deposits (the Framework) that will come into effect on 1 June 2023. This is aimed at moving the flow of credit to green projects by encouraging regulated entities to offer green deposits, protecting the interests of depositors, supporting customers with their sustainability agenda and addressing greenwashing concerns. The Framework will apply to all commercial banks and the green deposits will be issued as cumulative or non-cumulative deposits and they shall be designated only in Indian rupees.

Our view: The Framework creates a clear stance on third-party verification and allocation of proceeds. Given that India does not have a green taxonomy (although one may be in development), this offers key categories for the use of proceeds in a variety of green sectors.

3. Australia-Nature Repair Market legislation introduced (multi-sector)

The Australian Government is making progress with its Nature Positive Plan with the introduction of the Nature Repair Market Bill 2023 (the Bill) on 29 March 2023.

What: The Bill aims to protect and repair Australia's environment, with farmers, conservation groups, businesses, and local councils eligible to participate. Eligible landholders who undertake projects that enhance or protect biodiversity will be able to receive a tradeable certificate that will be tracked through a national register and can be traded and monitored in a Nature Repair Market for a set duration. Amendments from the initial draft include the strengthening of biodiversity integrity standards to align them with recommendations of the Australian carbon market's independent review. The Bill has been subject to wide debate from industry and a number of issues remain unsettled. Further details will be resolved at a later stage, with direction from a group of experts to be created under the legislation. 

Timing: The Parliamentary Committee is scheduled to report on 1 August 2023, with submissions due by 1 June 2023.

Similarly, the UK government published a Policy Paper to establish a framework for nature recovery and sustainable farming with the aim to accelerate growth to nature markets as part of its Green Finance Strategy (see more here).

ESG consultation round-up

Some notable ESG policy consultations in flight across the globe that are currently open for comment. Engagement is a great opportunity to influence the direction of travel for ESG matters.

1. EU Taxonomy Regulation Level 2 measures (multi-sector)

What: The EU Taxonomy Regulation sets out six environmental objectives, towards which an economic activity must make a substantial contribution in order to be eligible for sustainability.  The technical screening criteria for these environmental objectives have been released in two groups, with the criteria for #1 climate change mitigation and #2 climate change adaptation applying since January 2022.

The remaining four criteria (#3 the sustainable use and protection of water and marine resources; #4 the transition to a circular economy; #5 pollution prevention and control; and #6 the protection and restoration of biodiversity and ecosystems) were due to apply from January 2023 but have been delayed. The EU has now launched a four-week consultation on these objectives. The draft criteria prioritise the economic activities and sectors which are deemed to be the most relevant, while other sectors and activities, such as agriculture, forestry or fishing, as well as certain manufacturing activities, will be subject to further assessment and included in a later iteration of the criteria.

At the same time, the EU has launched a consultation on amendments to the criteria for the first two environmental objectives, which adds additional economic activities to the existing criteria. Read more about these consultations here.

Timing: In both cases, the consultation period closes on 3 May 2023. Once the consultation periods have closed, the Commission will then review the feedback it has received. It has indicated that it intends to adopt a legislative proposal for a Delegated Regulation in Q2 2023.

2. ESAs propose significant changes to EU SFDR level 2 Regulatory Technical Standards (financial institutions)

What: On 12 April, the European Supervisory Authorities (ESA) published an important consultation paper, "Review of SFDR Delegated Regulation regarding PAI and financial product disclosures".

The consultation proposes material changes to the existing disclosures required under the SFDR Regulatory Technical Standards (RTS), which came into force on 1 January 2023.  The proposed changes include revising the PAI indicators, new decarbonisation disclosures, enhanced DNSH disclosures, and broader amendments to the article 8/9 disclosure templates.  While this isn't quite SFDR 2.0, the consultation includes major changes to the RTS, and we can perhaps see it as SFDR1.5. Firms subject to SFDR - and in particular to the regimes covered by the RTS - will need to engage with these proposals and their likely practical impact.

Given the very significant effort across the asset management industry ahead of January 2023 to achieve compliance with the RTS, firms will likely be surprised by the extensive range of newly proposed amendments to the RTS, particularly as only 3 months have passed since the initial compliance deadline for the RTS.

We have published an initial news alert here with a more detailed briefing note and webinar to follow.

Timing: The consultation period closes on 4 July 2023.

3. UK ESG Ratings Consultation (multi-sector)

What: Alongside the UK Government's Green Finance Strategy, HM Treasury has also published a consultation on a "Future financial services regulatory regime for Environmental Social and Governance 'ESG' ratings providers". This seeks views on whether ESG ratings providers should be brought into the FCA's regulatory perimeter and on how this could be done.

Further activities may also be brought into regulation, including some cases of indirect provision of these assessments, and where these assessments are used in relation to certain things other than specified investments under the UK Regulated Activities Order. Any requirements would be developed taking into account international developments, in particular the recommendations provided by IOSCO.

Timing: HM Treasury is seeking views on the best way to ensure a proportionate but effective scope of regulation in the UK. As such, affected stakeholders including; ESG ratings providers, ESG data providers, users of ESG ratings, should consider responding to the consultation by 30 June 2023

4. UK CBAM Consultation (multi-sector)

What: Following the lead of the EU (see January ESG View), the UK is now consulting on the possible introduction of a carbon border adjustment mechanism (CBAM). The consultation explores a range of potential policy measures to mitigate carbon leakage and ensure UK industry has the optimal policy environment to decarbonise, including but not limited to a CBAM.

Carbon leakage arises where countries impose local environmental requirements on domestic industries, which results in these industries either relocating or losing out to competitors in cheaper countries with lower environmental standards. A CBAM would apply to imported products to ensure they are subject to a comparable carbon price to that incurred by UK-based production.

The consultation seeks views on the design and implementation of a potential UK CBAM, whilst emphasising that no decision has yet been taken to introduce a UK CBAM. If introduced, it would impact a number of sectors including: cement; chemicals; glass; iron and steel; non-ferrous metals; non-metallic minerals; paper and pulp; refining; fertilisers; and power generation. The earliest date for implementation of a potential CBAM would be 2026.

As well as a potential UK CBAM, the consultation considers a range of other measures to encourage decarbonisation, such as mandatory product standards, product labelling and public procurement initiatives, as well as emissions reporting that could support the implementation of these policies. Read more about the consultation in our summary here.

Timing: open for comments until 22 June 2023

5. Artificial intelligence accountability: US NTIA request for feedback (technology sector)

What: On 11 April, The National Telecommunications and Information Administration (NTIA) of the U.S. Department of Commerce, issued a request for feedback on artificial intelligence (AI) system accountability measures and policies. Such measures and policies would seek to assess and ensure that AI systems are legal, effective, ethical, and safe, and would principally operate by way of audits, assessments, certifications, or other mechanisms.

As an example of an accountability ecosystem that could serve as a model for AI assurance, the NTIA cites financial assurance, where financial auditing practices are relatively uniform. ESG assurance is another example put forward, as it provides a diverse and flexible set of standards, allowing companies to set their own structures for internal governance and level of disclosure. The feedback requested is intended to give the NTIA a better understanding of the suitability of existing models.

As part of its request for feedback, the NTIA has set out a list of questions, including:

• Can AI accountability mechanisms effectively deal with systemic and/or collective risks of harm, for example, with respect to worker and workplace health and safety, the health and safety of marginalized communities, the democratic process, human autonomy, or emergent risks?
• What are the most significant barriers to effective AI accountability in the private sector, including barriers to independent AI audits, whether cooperative or adversarial? What are the best strategies and interventions to overcome these barriers?

Timing: Written comments must be provided to the NTIA by 12 June 2023 and will be made public.